Posts tagged as “tax policy”

One of the featured commentaries in Saturday’s Statesman had me underlining phrases and chortling to myself with unexpected satisfaction. Ed Lotterman, the economist and sometime columnist from St Paul, wrote to extoll the little known but widely respected economist Professor John Taylor, of Stanford University.

But what caught my attention was the skewering Lotterman gave along the way to supply-side economics. I thought to myself, here at last may be a clear answer to the clown car’s insistence that tax rates be cut across the board.

Without getting too far into the weeds, economic theory can be divided into two schools: Keynesian theory as developed by John Maynard Keynes in the middle 1930s, and the classic view, such as the theories of Alfred Marshall as published in 1890 and founded upon the works of John Stuart Mill (middle 1800’s) and Adam Smith (late 1700’s), among others. Keynesian theory can be construed as centered on the consumer or demand side of the equation, and is focused on the short run. Classic theory, such as Marshallian economics, is more concerned with the production side of the equation, and takes a longer view.

Keynes’ views are still at the center of most modern thinkers. He thought consumers and their demands were the key economic drivers of the economy, and that government action was the fastest, most effective and therefore best way to influence these interests in the short run. Deficit spending, control of money and aggressive tax policy were simply tools in the bag to help regulate and smooth out bumps in the road. The assumption here is that periods of economic adjustment should be anticipated and wherever possible ameliorated by prompt action of the government. Most Democrats adhere to some form of modernized Keynesian theory.

The classical economists, like Marshall, reckoned that the fundamental axis of any economy consists of wants and needs, which are in constant flux and are constantly seeking equilibrium. Marshall thought that in the long run, these forces would naturally adjust to maintain an equilibrium if left alone. Neither taxes nor the supply of money should be manipulated for anything but short term effects, with a long run objective of permitting market forces to control over artificial restraints. Periods of economic adjustment should be tolerated with minimum levels of government interference. Republicans have traditionally favored some variant of the classical view.

The “supply-side theory” is an extension of the classical thought brought to light during the Reagan years, and advanced today by the extreme right edge. It takes the premise of the classical view of economics a significant step further to the right in three areas: (1) the elimination of government restraints to production; (2) elimination of government regulation of the flow and quantity of money (The extreme view here is for a return to the gold standard); and (3) cut tax rates for all, even if such is to levels below that required to generate revenue for current needs. The tacit assumption here is that periods of economic adjustment should be tolerated with no interference from the government.

Lotterman maintains that supply-side economics has been completely debunked by most economists, including the more distinguished of those from the right, like Professor Taylor. He observes that in his 34 years of teaching (which would reach back to the edge of the “trickle down” economy days of Ronald Reagan) he has not run across a single textbook that asserts supply-side economics as truth.

On the specific question of tax policy, the plain facts are that if tax rates are cut to a level below that required to maintain the government, the short term effect will be that revenue will decline and the deficits will increase. Without further cuts to spending, which even the Republicans concede would be Draconian, Keynesian theory teaches that where such is imposed in time of economic growth, the extra stimulus is artificial and unnecessary and becomes inflationary.

The upshot of it all is that measured by today’s present level of increasing growth, any artificial tax reduction would increase deficits without any commensurate benefit in the short run, and if maintained into the long run, such will eventually destabilize the economy.
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This means the answer to the question on clown car’s pronouncement of tax policy is that in the short run, we lose, and in the long run its all nonsense. Period. Class dismissed.

Statement

“the freedom of Speech may be taken away — and, dumb & silent we may be led, like sheep, to the Slaughter.”George Washington, 1783

“We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.” Louis D. Brandeis

For what shall it profit a man, if he shall gain the whole world, and lose his own soul?Mark 8:36 KJB